Law360 recently published an article by Baker Botts Partner Matt Larsen and Senior Associate Derek Young highlighting potential 2021 tax legislation.
To read the article in Law360, please click here.
Texas tax was no exception to 2020's complications and uncertainties.
COVID-19 gave rise to important new tax issues such as whether the property tax temporary exemption for qualified property damaged by disaster applies to economic damage caused by a global pandemic — according to Attorney General Ken Paxton, it does not.1
Another such issue was whether appraisal review boards, whose members are often elderly, can force taxpayers to participate in video conference hearings rather than in-person hearings — they cannot.2
Some issues, like whether a taxpayer is entitled to a temporary exemption due to damage caused by COVID-19, are very likely to be litigated in 2021, although final determinations are unlikely until at least 2022, causing uncertainty to continue through the next year.
The unpredictability of the following year is not going to be limited to issues born in 2020; 2021 will bring its own batch of issues.
Texas' Legislature meets in the spring of every odd year, so speculation has begun about potential 2021 tax legislation. A critical threshold issue is how the Texas 2021 legislative session will look. The session starts next month, and it is not clear how the Legislature will operate.3
There are concerns that COVID-19 safety measures will limit the number of bills that receive serious consideration, which is not ideal in a session where the Legislature will need to tackle a multibillion-dollar budget shortfall. Even for bills that do receive serious consideration, it is not clear who will be in the building or how public hearings will take place.
Despite this backdrop of uncertainty, it is still likely that meaningful Texas tax legislation will be enacted in the 2021 legislative session. The following are some too-early predictions of issues that are likely to receive legislative attention.
Likely Legislative Issues
The 2021 legislative session will commence on Jan. 12 and adjourn on May 31. Prefiling of bills began on Nov. 9. Bills on some of the issues below have been prefiled. Additional bills will likely be filed in connection with these issues as the session progresses.
Chapter 313 Renewal
Chapter 313 — named for the chapter of the Texas Tax Code it occupies — is an important economic incentive available to Texas school districts. Texas has relatively high property tax rates and school district taxes account for as much as half of the total rate.
Through Chapter 313, school districts can attract development by offering large manufacturing projects a 10-year value limitation, fixing a taxpayer's property at a value which is often significantly lower than its market value.
Taxpayers often save millions of dollars under Chapter 313 agreements, which savings they share with the sponsoring school district under the agreements. Because Texas' school finance system guarantees districts a certain level of revenue, a school district will net more revenue with a Chapter 313 agreement than the district would without it.
Chapter 313 is set to expire on Dec. 31, 2022, so if Chapter 313 is not renewed during the 2021 legislative session, it will expire in 2022.
Sen. Beverly Powell, D-Fort Worth, has filed S.B. 144, which would extend the expiration date of Chapter 313 until Dec. 31, 2032. We expect S.B. 144 or a similar bill to attract a lot of attention. While Chapter 313 has been crucial in attracting over 400 large manufacturing projects — and their accompanying jobs and capital investment — to Texas, some have argued for limiting the program's scope or the types of projects it targets.
Swapping Property Tax for Sales Tax
In the 2019 legislative session, Rep. Andrew Murr, R-Junction, introduced H.B. 297, which would have eliminated school district maintenance and operations taxes in January 2022 and appointed a committee to study expanding Texas' sales tax to make up for the lost property tax revenue. The bill was passed by the Texas House of Representatives, but it did not get out of the Texas Senate Committee on Finance.
H.B. 297 likely did not get through the Senate because it had major issues. One major issue is that it eliminated the largest component of Texas property tax without offering a substitute. Instead, H.B. 297 would have created a committee to study the issue. In other words, H.B. 297 sought to solve a problem without offering a solution. And the solution is tricky.
The fiscal note to H.B. 297 stated that Texas would have to raise its sales tax rate 5.75% to offset the revenue lost from eliminating school district maintenance and operations property taxes. This would have given Texas the highest average combined sales tax rate in the country, with a state rate of 12%, plus a local rate of up to 2%.
Of course, raising the rate is not the only way to increase sales tax revenue. Texas could have expanded the sales tax base by eliminating exemptions or taxing additional services. Texas taxes all sales of tangible personal property unless exempt, but it only taxes a few enumerated services.
Again, H.B. 297 did not offer a plan to broaden the tax base, nor did it contemplate how to deal with issues associated with broadening the tax base.4
Regardless, H.B. 297 garnered a surprising amount of support from certain taxpayers and legislators, considering that swapping property taxes for sales tax would shift the overall tax burden from businesses to individuals and would be viewed by many as creating a more regressive tax system — property tax is generally thought to be less regressive than sales tax.5 This is particularly the case given Texas' taxation of essential items, such as clothing and feminine hygiene products, that some other states exempt.
Despite these headwinds, there is a good chance that a bill expanding sales tax to buy down property tax rates will be filed this session. On Sept. 14, the House Ways and Means Committee issued Charge 2, which seeks public comments on "possible methods of providing property tax relief, including potential sources of revenue that may be used to reduce or eliminate school district maintenance and operations property tax rates."
Unequal Appraisal Property Tax Appeals
The Texas Constitution provides that "[t]axation shall be equal and uniform." To ensure that property taxation is equal and uniform, the Legislature enacted Texas Tax Code Section 42.26, which provides a remedy for unequal appraisals. The statute provides taxpayers with three separate avenues to prove an unequal appraisal.
Two of those avenues, Texas Tax Code Sections 42.26(a)(1) and (2), are often too expensive or complicated to pursue because they require taxpayers to conduct market value appraisals of many similar properties. As a result, the third avenue, Texas Tax Code Section 42.26(a)(3), is most commonly pursued. Section 42.26(a)(3) provides that a taxpayer is entitled to relief if "the appraised value of [its] property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted."
Section 42.26(a)(3) does not provide any guidance on where the comparable properties must be located. There do not appear to be any published decisions where the comparable properties were located in a different appraisal district than the property at issue, but neither Section 42.26 nor the Texas Constitution place any limitation on where the comparable properties must be located.
S.B. 134, which was prefiled by Sen. Nathan Johnson, D-Dallas, would amend Section 42.26(a)(3) to clarify that the comparable properties must be located in the same appraisal district as the property at issue.
But it would also add a new subsection to Section 42.26 that would allow taxpayers to use comparable properties located in other Texas appraisal districts if "a reasonable number of comparable properties does not exist in the appraisal district" where the property at issue is located.
In other words, a taxpayer would first need to look within the appraisal district where its property is located, and if there are not enough comparable properties, it could look to other parts of Texas.
Allowing taxpayers to look to other parts of the state makes sense. Otherwise, many property types where there would not be comparable properties within the same appraisal district, such as power plants, would be denied an avenue for challenging unequal appraisals. It will be interesting to see if the legislature thinks S.B. 134 is expanding the pool of comparable properties — something the lack of case law suggests — or simply requires a taxpayer to look within the appraisal district before using considering comparable property located in other parts of the state.
Despite continuing uncertainty and challenges related to COVID-19, the Texas Legislature will likely maintain its recent focus on reducing the state's relatively high property tax burden. Related issues will likely include the structure of key property tax incentives to attract new investment and jobs, along with procedural and other changes to increase the equity of the property tax system. The extent to which limitations caused by COVID-19 impact the Legislature's activity and focus will be a interesting undercurrent as the 2021 legislative session develops.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
1Tex. Att'y Gen. Op. KP-0299 (April 2020).
2Tex. Att'y Gen. Op. KP-0307 (May 2020).
3See Cassandra Pollock, The Texas Legislature meets in less than 100 days. Nobody knows how the session will look, The Texas Tribune, Oct. 6, 2020.
4See John Kennedy and Dale Craymer, Letter to the Honorable Dustin Burrows (September 14, 2020) (detailing issues with eliminating exemptions and taxing additional services).
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm of more than 700 lawyers practicing throughout a network of 13 offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology, and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.